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Many married couples pay more taxes than they would if they were unmarried. This penalty can amount to several thousand dollars per year even for moderate-income families. The 1993 tax increase made the problem worse. The House Republicans' Contract With America proposed abolishing the marriage penalty altogether.
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| "The marriage penalty can amount to several thousand dollars per yar." | The History of the Penalty. Prior to 1948 the tax code made no distinction between married couples and individuals. In that year Congress changed the law to allow income splitting. In effect, couples were taxed like two single taxpayers even if only one earned income. The result was to sharply lower tax rates for married couples, creating a de facto subsidy for marriage. By 1969 this subsidy had grown so large that a single person could pay 40 percent more in taxes than a married couple with the same income. This led Congress to create separate tax schedules designed to reduce the marriage subsidy to no more than 20 percent.
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An unintended consequence of the 1969 law change was to create the first marriage penalty. The penalty was most likely to emerge when a married couple both worked -- important because in the early 1970s the number of working women increased sharply. In 1969 the female labor force participation rate was 42.7 percent; by 1979 the rate had risen to 50.9 percent. Thus as more women entered the labor force, an increasing number of couples were subject to the marriage penalty. Why Is There a Penalty? The basic reason is our progressive tax rates. The second earner in a family (the lower paid of the two) has his or her income added to that of the primary earner and thus is often taxed at a higher marginal rate. For example, under current law, if the primary earner had $22,000 of taxable income, he or she would pay tax at a 15 percent rate. If the secondary earner also made $22,000, the family's total income would be in the next higher tax bracket and the secondary worker would pay 28 percent on the last $4,000 of his or her income. The marriage tax would amount to $520, the difference between 15 percent and 28 percent on the couple's income above $38,000, which is the cutoff for the 15 percent bracket. Were they unmarried, both would pay just 15 percent on all their income. Congress's first response was to create a special tax deduction in 1981. It allowed couples with two incomes to deduct 10 percent of the earnings of the lower-paid spouse in addition to their other deductions. In 1986, Congress replaced the two-earner deduction with a new standard deduction designed to eliminate the marriage penalty. Although these changes substantially mitigated the penalty, in 1988 some 40 percent of families still paid for being married -- a tax price that averaged $1,100.
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| "The 1993 tax increase exacerbated the marriage penalty problem." | Adding to the Burden. The 1993 tax increase exacerbated the marriage penalty problem by creating two new tax brackets, a 36 percent rate beginning at $140,000 of income for married couples and a "millionaires' surtax" of 39.6 percent, which starts at $250,000 of income. The new brackets create more opportunities for the secondary earner to be pushed into a higher tax bracket than if he or she were single.
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In addition, 1993 changes in the Earned Income Tax Credit (EITC) had the effect of increasing the marriage penalty. This is because as the credit is phased out it creates a higher de facto marginal tax rate of 21 percent. According to the November 7, 1994 Forbes, by 1996 a married couple with four children and income of $11,000 each would get a credit of $1,375. However, if the couple split and each took two children, both would be entitled to a credit of $3,560. Thus they would have a total credit of $7,120, or a $5,745 reward for getting divorced. On a total income of $22,000 per year, their penalty for being married would be enormous. The Child Penalty. The Clinton tax changes increased the marriage penalty for the rich and the poor. Those in the middle were largely unaffected. But the changes also penalized married couples with children more than those without children. Take a couple each earning $10,000 a year. As Figure XI-1 shows, if they have no children, the marriage penalty is $188. If they have two children, the penalty soars to $3,717. That is a tax of $1,265 per child.
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| "The penalty for a couple earning $50,000 each is $1,326 if they have no children and $4,348 if they have two - a penalty of $1,511 per child." | As Figure XI-2 illustrates, the penalty for a couple earning $50,000 each is $1,326 if they have no children and $4,348 if they have two -- a penalty of $1,511 per child. And a couple earning $300,000 each pays a penalty of $15,521 if they have no children and $21,627 if they have two -- a penalty of $3,053 per child.
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Abolishing the Penalty. The Republican Contract With America proposed eliminating the marriage penalty altogether. Since the penalty results partly from the effects of a tax subsidy program, the net cost of eliminating it would be only about $6 billion on a static basis. But since this effectively would entail abolishing the EITC, it is not likely to be done because it would constitute a large tax increase on the poor. If the penalty were eliminated only for those with a positive tax liability, the cost would be $33 billion. The latest increase, obtained by Clinton, could be repealed for $10 billion. In the end, the only sure way to abolish the marriage penalty may be to abolish progressivity altogether and institute a flat-rate income tax, such as that proposed by Rep. Dick Armey. The good news is that higher cigarette taxes cause people to quit smoking. The bad news is that as fewer people smoke, the federal government gets far less revenue from cigarette tax hikes than many people expect. And to the extent that higher cigarette taxes increase federal revenues, they take most of the money from the families that can least afford it.
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| "Higher cigarette taxes would take most of the money from those who can least afford it." | The Case for Higher Cigarette Taxes. In 1993, President Clinton and the Democratic leadership hoped to pay for health care reform in large part by increasing taxes on tobacco products. The original Clinton bill would have added a 99-cent tax on every pack of cigarettes to the current federal tax of 24 cents and state and local taxes of about 28 cents. The versions of the Clinton plan introduced by Sen. George Mitchell (D-ME) and Rep. Richard Gephardt (D-MO) would have increased the federal cigarette tax to 69 cents a pack, while the Senate Finance Committee health bill would have raised the tax to $2.24 a pack.
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Proponents argued that an increase in federal tobacco taxes would offset some of the burdens smokers place on the economy. The tax increase also would, they said, deter people from smoking. Are these arguments sound? Let's take a closer look. Do Smokers Impose Costs on the Rest of Society? Apparently some, but less than most people think. The Centers for Disease Control contends that smokers incur $50 billion in health care expenses -- an amount equal to $2.06 per pack at current smoking levels. However, smokers mainly pay their own way. Of the $2.06, only 89 cents represents costs for nonsmokers -- primarily borne in the form of taxes to support Medicare and Medicaid. Moreover, smokers create a positive if ghoulish benefit for nonsmokers. Because they die earlier, smokers avoid health care expenses that might have otherwise been incurred over a longer life. They also save society money in Social Security payments and private pension benefits. When that element is factored in, a Rand Corporation study found that the net cost smokers create for nonsmokers equals about 28 cents a pack at 1993 prices. Is an Increase in the Tobacco Tax Needed to Make Smokers Pay Their Own Way? No. Since current federal and state taxes total 52 cents a pack, smokers are paying more than their fair share.
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| "Smokers are paying more than their fair share." | Granted, there is some dispute about whether 28 cents is the right estimate. That number does not include the effects of secondhand smoke, which the Environmental Protection Agency (EPA) says causes 3,000 lung cancer deaths a year. Yet the EPA conclusion is based on a controversial review of other studies and is not taken seriously by most scholars.
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A more profound problem is that the Rand estimate omits the extra costs of miscarriages and neonatal intensive care attributed to pregnant women who smoke. Yet all things considered, the Congressional Research Service is probably correct to conclude that the external cost argument does not justify any increase in tobacco taxes. Who Pays Tobacco Taxes? Primarily, lower-income families. Other things equal, the lower a person's income, the more likely that person is to smoke. For that reason a tax on tobacco is perhaps the most regressive of taxes -- even more regressive than taxes on beer, wine or gasoline. A study by KPMG Peat Marwick found that:
Do Higher Cigarette Taxes Cause People To Quit Smoking? Yes. And that might be a justification for a higher tax. But the more people quit, the less revenue would be collected. Nobel prize winner Gary Becker and his colleague Michael Grossman estimate that if the federal cigarette tax were increased to 95 cents, smoking would be cut in half. At a tax of $2.24, cigarette consumption would go down by 73 percent. It would take several years to get the full effect of the drop-off, as some people smoked less, some quit smoking altogether and teenagers, who are especially sensitive to price, decided not to smoke. Despite the fact that tobacco may be addictive, the U.S. evidence is that smokers respond to economic incentives. There is evidence from other countries as well. Since 1982, Canada has doubled its cigarette tax to $6 a pack and cigarette consumption has dropped by 40 percent.
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| "The most additional revenue cigarette taxes could raise is about $6.5 billion." | How Much Additional Money Could Be Raised from Higher Tobacco Taxes? Economists Becker and Grossman estimate that a 10 percent increase in cigarette taxes eventually leads to an 8 percent decrease in cigarette consumption. Above a tax rate of about 95 cents, further increases in the tax rate would lead to lower tax revenue. (See Figure XI-4.) The most additional revenue that can be raised with cigarette taxes is about $6.5 billion, say the economists, not the $30 billion that the antismoking lobby claims.
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Even if Little Revenue Is To Be Raised, Should We Increase Cigarette Taxes To Discourage Smoking? Not if we want to be consistent in our social policies. There is no question that we could begin to change people's behavior with taxes on saturated fat, unsafe sex and such risky activities as hot air ballooning, scuba diving, hang gliding and motorcycle riding. But we do not.
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| "Living in a free society means being free to take risks." | Part of what living in a free society means is having the right to take risks without asking others' permission and without paying others a fee for the privilege of exercising that right. |
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